Q2 2022 1stdibs.Com Inc Earnings Call

August 10, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Okay.

Good day, and thank you for standing by and welcome to the first Dibs Dot Com second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Kevin La bus. Please go ahead.

Yeah.

Good morning, and welcome to first earnings call for the quarter ended June 30th 2022.

I'm, Kevin the Buzz head of Investor Relations and corporate development.

Joining me today are CEO , David Rosenblatt, and CFO , Tom Edgar Gino.

David will provide an update on our business.

<unk>, our strategy and growth opportunities.

And Tom will review, our second quarter financial results and third quarter outlook.

This call will be available via webcast on our Investor Relations website at investors got first dibs Dot com.

Before we begin please keep in mind that our prepared remarks include forward looking statements.

Including but not limited to statements.

Statements regarding guidance and future financial performance.

Market demand.

Growth prospects.

Business plans and strategic.

Initiatives.

Evaluation of alternatives.

Is this an economic trends or dynamics.

Including e-commerce growth rates and our potential responses there too.

International opportunities and competitive position.

Our actual results may differ materially from those expressed or implied in these forward looking statements as a result of risks and uncertainties include.

Including those described in our SEC filings.

Any forward looking statements that we make on this call are based on our beliefs and assumptions as of today.

We disclaim any obligation to update them, except to the extent required by law.

Additionally, during the call, we will present, GAAP and non-GAAP financial measures.

A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release.

Which you can find out our investor relations website.

Along with the replay of this call.

Lastly, please note that all growth comparisons are on a year over year basis, unless otherwise noted.

I'll now turn the call over to our CEO David Reis.

David.

Thanks, Kevin Good morning, and thank you for joining us today.

Amid a challenging operating environment for E Commerce and home goods, we delivered <unk> and revenue within our guidance range and EBITDA margin above our guidance range as we manage expenses in light of continued soft consumer conversion.

We strengthened our balance sheet and streamlined our business with the sale of design manager for $14 8 million generating a healthy nine 7 million return on our purchase price.

Lastly, we're pleased with the early signs of traction in our key strategic initiatives auctions international expansion and supply growth.

During the quarter some business trends remained resilient as compared to our last earnings report while other softened.

First I'll review what remained resilient.

Traffic growth accelerated versus the first quarter or do the SCO games and upper funnel activity in general remained robust trade.

Trade growth continued and returning buyer conversion increased as well.

Supply growth remains healthy helped by our pricing test.

Adding new sellers at three times last year's monthly run rate.

Additionally, seller churn remains at historic lows finally, our strategic initiatives are making solid progress while metrics are moving in the right direction. These efforts are in their early stages and <unk> contribution isn't yet large enough to offset softening new buyer conversion.

Now onto what softened.

Most importantly, consumer growth, which has historically, 70% to 75% of Gms declined further due to conversion softness, particularly for new buyers.

We're bringing more traffic to the marketplace, it's not converting at historical rates. There are multiple factors that play here. In addition to economic uncertainty consumers are spending less online in favor of out of home experiences such as travel and dining out.

In addition, we are seeing a traffic mix shift towards mobile web, which is a lower converting device type.

Given softening demand, we have begun recalibrating, our expenses, which Tom will review in more detail.

With two thirds of our CMV from furniture, where at the intersection of E Commerce and home goods two areas negatively impacted by increased mobility post COVID-19 and heightened economic uncertainty.

We see this most significantly in lower conversion rates, we have begun and intend to continue responding forcefully to this change set of circumstances.

At the same time, what encourages us is that with the exception of new buyer conversion. We believe the long term drivers of our competitiveness and the value we provide to buyers and sellers remained healthy track.

Traffic growth accelerated in the second quarter, our organic traffic mix increased supply growth is robust and seller churn is low.

Auctions are improving sell through and new buyer activation rates.

Additionally, 50% of auction buyers in the second quarter have never purchased from first dibs before.

Lastly, while we intend to continue to invest responsibly in auctions international expansion and supply growth. We are re prioritizing projects and continuing to identify cost efficiencies. So that when demand for home categories rebounds, our business will be more efficient and in a stronger more competitive.

Position.

We are committed to re accelerating <unk> growth and enhancing shareholder value and are reviewing multiple paths to help us achieve these objectives alternatives may include buy and sell side M&A capital return strategies and partnerships as well as revisions to our operational objectives and <unk>.

We are working with our financial advisors that Allen and company to evaluate all options.

Turning to operations, we continue to enhance our platform for buyers and sellers similar to the first quarter top of funnel activity remains healthy with traffic registrations and item favorites growing by double digits.

Organic traffic mix increased by over five percentage points year over year, driven by continued strength in SCO, coupled with a pullback in paid spec.

Re accelerating <unk> growth is a top priority our largest lever is improving conversion, particularly for new buyers and on mobile web. In addition to our strategic initiatives, we have a number of projects and tests underway focused on this.

During the second quarter, we prioritized projects to increase checkout entry and reduce purchase friction for example, we launched improvements for low inventory pages tested increasing the visibility of items with lower shipping costs and search and improve the discovery of auctions listings, which have higher sell through and.

Conversion rates.

Conversion is a game of incremental gains the goal is to keep accumulating small wins that compound over time.

On the supply side, our seller team launched a bulk upload tool saving sellers time and supporting listings growth. Additionally, we rolled out inventory lifecycle recommendations, which suggest AIDS and engagement based actions to help sellers optimize sell through.

We also made meaningful progress in our strategic initiatives, which I'll review in more detail below.

Auctions are making great progress bidder activity order volume and <unk> continue to grow sequentially. In June for example, auctions accounted for over 5% of total orders as compared to 1% of supply and this trend carried over into July .

In addition to higher sell through rates another strategic rationale for building auctions was activating new buyers during the quarter, 50% of bidders had never made a purchase on first steps.

<unk> average order value was under $1000 less than half of the <unk> in our marketplace overall.

Lower <unk> is what we expected for auctions and is consistent with the value oriented channel.

Lastly auction supply continues to ramp we added 20000, new auction listings in the second quarter up 100% from the first quarter. However that is just a fraction of our $1 4 million listings. We believe there is ample opportunity to meaningfully expand supply from our existing items.

Since launch we've enhanced the auctions product experience through weekly updates to focus this quarter was building features that optimize for value and urgency to drive bid participation by for example, displaying the original list price in search and browse and on product pages to highlight value.

We also build tools for scaling auction events.

These are curated groupings of items with the same launch date akin to a physical auction.

Hence drive urgency traffic and bid participation.

Starting in May we increased the cadence of curated events to monthly from every other months. Additionally, our work to boost supply and set competitive options pricing is ongoing.

Given the success, we're seeing we are evaluating shifting existing resources to auctions.

June also marked the first full month of operations for both of our localized sites, Germany went live on April 26, and France launched on May 10 users.

Users in these countries can now search and local languages. The search results to prioritize items located in Europe and experience a fully localized customer journey, including currency customer service and shipping.

While it is still early we believe were seeing promising performance in both markets given the highly considered nature of our purchases. Our first priority is growing traffic from performance marketing in SCO.

Traffic from French IP addresses grew 60% year over year during the quarter, while traffic from German IP addresses grew over 75% year over year, even though these sites launched late in the quarter.

Building, an international business is a multi year process and we're off to a great start.

Our development philosophy is to prioritize speed to market and then test and iterate as we gather data and feedback for the rest of the year. Our international focus will be optimizing foreign language paid marketing building Seo authority and introducing product enhancements like incorporating real time machine <unk>.

<unk> into our message center.

We see a meaningful long term international opportunity today about 40% of our sellers one third of our traffic and one fifth of our buyers are located outside the United States.

Because supply begets demand for two sided marketplaces accelerating supply growth is another priority. Our goal is to aggregate the world's most beautiful items, regardless of where they are located while maintaining our curatorial standards.

<unk> drives traffic make search results more robust and increases the chances that will make a match.

Given our long tail of one of a kind listings, providing buyers with more options should ultimately translate into higher order volumes.

Our new seller pricing test, which launched in January continued to perform well.

We signed over 700, new sellers in the second quarter ending June with over 6100 seller accounts.

The number of sellers and listings continue to grow at healthy double digit rates and our monthly solar acquisition was triple our monthly average in 2021.

Insistent with the first quarter we.

We expect the pace to slow during the summer when many sellers take vacation.

As a reminder, we launched our pricing tests for new sellers in January .

This allows sellers to choose the plan that best fits their business and includes a subscription free tier with a higher commission rate.

This reduces friction by lowering the upfront cost of trying first dibs and remains the most popular option for new sellers.

Despite material growth in our seller base.

Absolute number of churn sellers declined year over year.

As I mentioned above while we believe the metrics for auction international and supply growth are trending in the right direction.

These efforts are in their early stages, and CMV contribution isn't yet large enough to offset softening demand.

Over the past few months the market for NFC has slowed dramatically and we were not immune while we continue to believe in the long term promise of the digital art market given the reduced near term outlook, we have paused incremental investment in our <unk> platform.

During the quarter GMB growth rate softened month over month from April through June and this trend has carried over into July .

Given the slowdown we're focusing on what we can control and taking actions to better align expenses to demand for example, we have <unk>.

Drastically reduce the number of open roles limited hiring to critical positions and increase the efficiency targets on our performance marketing spend however, fundamentals like traffic and supply growth remained healthy and our strategic initiatives are gaining traction, which we believe in turn sets us up for future success.

We intend to continue adjusting to the environment, while focusing on the strategic initiatives that we believe will drive our long term growth.

We are also working with our financial advisors that Allen <unk> company to review multiple paths to enhance GMB growth and shareholder value.

When e-commerce growth rebounds, we expect to be more focused more efficient and poised to capitalize.

Thanks, David.

We delivered Gms and revenue at the low end of our guidance range and EBITDA margins above the high end <unk>.

<unk> was $104 8 million down 2%.

In the first quarter, we saw strong top of funnel engagement, but softer conversion.

These trends are exaggerated in the second quarter.

While traffic growth accelerated conversion softened, particularly for new buyers.

This was partially offset by returning buyer conversion, which improve modestly year over year.

Trey JMP growth decelerated, but remained positive while consumer G&P declined.

Trade remains a relative bright spot the number of spending trade firms and average spend per firm. Both increased we believe pipelines and project volumes remain healthy, but we expect to see a return to normal seasonality in the third quarter, which is historically slower for trade.

As a reminder, when we referenced trade JMP or consumer JMP. We are speaking about the subsets of on platform GMB attributable to each of these buyer groups.

Turning to vertical performance, new and custom furniture in jewelry GNP grew while all other verticals declined consistent with recent quarters vintage and antique furniture accounted for less than 50% of <unk> and the majority of our first time orders.

To come from newer categories, like art jewelry, and new <unk> custom furniture.

Average order value growth moderated in part due to a mix shift to auctions.

<unk> for auctions is a conscious part of our strategy and has many benefits, including higher sell through conversion and new buyer activation.

We ended the quarter with approximately 69300 active buyers flat year over year and down 3% quarter over quarter.

We expect this metric to be choppy near term as we manage through strong comps from the pandemic related e-commerce boost in a period of softer conversion.

On the supply side of the marketplace, we closed the quarter with over 6100 seller accounts up 40%.

Net revenue was $24 $6 million flat year over year transaction revenue, which is tied directly to GMP growth was approximately 70% of revenue with subscription is making up the bulk of the remainder.

Given the design manager sale closed on June 29th second quarter results included a full quarter of contribution design.

Design manager accounted for roughly 3% of revenue in the quarter.

Gross profit was $16 $6 million down 4%.

Gross profit margins were 68% down from 70% a year ago.

Gross margins declined year over year due to a higher hosting and co location costs payroll and benefits and stock based compensation the higher hosting in co location costs was the result of accelerated traffic growth, which were not offset by higher <unk> and revenue due to softening conversion.

Additionally, our operational teams make up approximately 30% of cost of revenue given current demand we are seeing negative operating leverage here.

Lastly, payroll and stock based compensation expenses to reflect a full quarter of our annual merit increases and stock based compensation refresh which went into effect in March. In addition to cost of revenue. These annual merit increases impact head count related expenses across all operating areas.

Sales and marketing expenses were $11 $3 million flat year over year.

Growth in head count was offset by lower performance marketing spend given softening conversion, we pulled back on performance marketing during the quarter.

This is an example of recalibrating expenses to match demand.

Sales and marketing as a percentage of revenue was 46% flat year over year.

Technology and development expenses were $6 $6 million up 45% driven by higher stock based compensation and payroll and benefits.

Reflect both hiring to support our strategic initiatives as well as our annual merit cycle as mentioned above.

As a percentage of revenue technology development was 27% up from 18%.

General and administrative expenses were $7 $5 million up 58%. The increase was mainly driven by expenses related to public company costs, including D&O insurance and increased head count higher stock based compensation and approximately $300000 of one time legal fees related to the sale of design manager.

As a percentage of revenue general and administrative expenses were 31% up from 19%.

We went public in June 2021, so this will be the last quarter of cycling periods without fully loaded public company costs.

Lastly, provision for transaction losses were $1 6 million, 6% of revenue flat year over year.

Adjusted EBITDA loss was $6 $1 million compared to a loss of $3 million last year. Adjusted EBITDA margin was a loss of 25% versus a loss of 12% last year. This year over year change was driven primarily by higher G&A expenses and higher technology development spending against flat revenue growth.

Combined public company costs and head count supporting strategic initiatives, primarily in technology development were approximately $4 million in the second quarter.

Excluding these expenses our second quarter adjusted EBITDA would have been a loss of roughly $2 million an improvement versus last year.

Moving onto the balance sheet, we ended the quarter with a strong cash and cash equivalents position of $162 $7 million, including the proceeds from our sale of design manager for $14 8 million.

Turning to the outlook demand cool throughout the second quarter and this trend has so far carried into the third quarter.

We forecast third quarter, <unk> of $88 million to $95 million down 19% to 13% year over year.

Net revenue up $27 million to $21 $9 million down 19% to 14% year over year.

And adjusted EBITDA margin loss of 37% to 33%.

<unk> guidance reflects a number of converging factors, including shifting consumer behavior ongoing economic uncertainty and conversion headwinds and the <unk> contribution from our strategic initiatives will increase sequentially, but won't be enough to offset water conversion softness.

Turning to adjusted EBITDA margins guidance reflects a softening demand environment and a sequential decline of approximately $3 million in revenue at the midpoint, resulting in negative operating leverage.

Lastly.

Starting in the third quarter results will not include design manager, which generated less than $1 million in quarterly revenue and was operated approximately EBITDA breakeven.

During the second quarter, we began taking steps to align our cost base to current demand. We expect that this work will continue in the third quarter to date, we've limited hiring to critical positions increased our efficiency targets for performance marketing spend and started rationalizing non head count costs, we continue to aggressive.

We renegotiate contracts as they renew Additionally, we are actively marketing our New York office space with the goal of reducing our real estate footprint.

Some of these actions our immediate while others will take time to impact the income statement.

We are not satisfied with the EBITDA margin is reflected in our third quarter and are focused on identifying and realizing incremental cost savings.

In summary, our expectation is that e-commerce will revert to historical growth rates over time, we are positioning ourselves to emerge from the current environment with a deeper competitive advantage. That's why we continue investing in auctions international expansion and supply to drive long term growth, while managing expenses elsewhere as always.

We intend to adjust as needed balancing long term growth and EBITDA margin expansion.

Thank you for your time I'll now turn the call over to the operator to take your questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Trevor Young with Barclays. Your line is now open.

Great. Thanks, two if I may 1st given the current environment. It would seem that they are balance sheet gives you a pretty sizeable competitive advantage versus some of the private in the space.

What buy side M&A opportunities might make sense I'm, obviously, not looking for specific target, but rather like any categories that are complementary or any capabilities that might be attractive in the context of buy versus build and then second one on the strong trends in auction could you just provide some color on which categories tend to do better in that auction format.

Hey, good morning.

This is this is David yes. So first in terms of M&A. We do think this environment potentially does create opportunities, especially among smaller private companies that may have challenges in raising capital.

The criteria is any different in this environment than it ever would be.

Any other we have a very clear strategy and I think we would evaluate possible partners in the context of.

Being able to help those strategies, so it could be straight consolidation or it could be some of the things you mentioned vertical expansion geographic expansion and so on.

But overall again I don't think its.

I don't think its any fundamentally different than any other market environment and in all cases, we would it's important for us to remain focused on our strategy.

In terms of auctions as I mentioned in the script. We are very pleased with our growth in auctions order volume for example, in Q2 was up 49% versus Q1.

I think it's a little too early to call it.

On different verticals.

Jewelry and art had been strong for us, but again, we think it's super early and Thats an opportunity exists in all of our verticals.

Great. Thanks, David.

Thank you.

Our next question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Great. Thanks for taking the questions.

With kind of weaker conversion and just kind of challenged macro conditions there.

There are options on the platform to kind of get a little more nimble with maybe lower <unk> items that could convert.

Better and then a second question on kind of shifting preference for mobile.

Mobile browser I think is what you said.

I mean, what initiatives do you have in place to kind of drive conversion up there is that forcing people maybe more into the app as opposed to the mobile browser.

There would be great. Thanks.

Yes, so a couple of things first let me start with conversion in.

In general the way I would characterize our top of funnel activity is that.

The very top of the funnel traffic and engagement metrics, including things like <unk>.

And registrations and so on have been very healthy as healthy as they've ever been in the business.

When we look at conversion the softness in conversion is concentrated or specific to new buyer conversion.

The conversion rate from returning buyers is actually higher or was higher in Q2 than it had been in Q2 of prior.

And as you correctly point out that softness in turn is driven largely by a mix shift in favor of.

Mobile web.

And lower converting channels.

Our strategy is there again are not that different from what they had been in the past, which is a combination of on one hand incremental kind of always on improvements to the core user experience things like figuring out how to optimize how we present shipping prices.

And.

Changing around the format on mobile web landing pages and so on yes, we want to continue to drive people into the app as well as conversion rates, which are substantially higher than mobile web.

With respect to your second question in terms of <unk>.

We have seen relative strength actually in lower <unk>.

Orders, which for US is below $1000 I think that's across the board auctions has a <unk> that is kind of in that ZIP code and then we're seeing at the same time strength in the non auction marketplace.

Price points as well, where we've seen softness is that higher.

Higher <unk> levels again, not surprisingly.

So we are continuing to feed that primarily through our strategy to expand supply via experimentation with different pricing formats.

Seller pricing format.

Thank you. Our next question comes from the line of Justin Post with Bank of America. Your line is now open.

Great. Thank you.

A couple of questions on sellers Youre seeing a lot of accounts added, but obviously <unk> is slowing.

Any pushback, there and how is non transaction revenue trending.

Sir.

You take the first question and then I'll kick it over to Tom for the second question.

In terms of supply so yes, as you correctly point out we're adding sellers that are roughly three times the rate that we added them historically churn I will also note is that kind of all time historical lows.

However, given the length of the sales cycle on <unk>, there is a pretty substantial lag time between when we add sellers when they add supply right because there's a cumulative effect as they add more supply over time and then when those translate into GMB. So were.

In the phase now, where we're adding a lot of sellers, obviously most of that supply has not yet converted into orders.

But that's in line with the experience of all sellers on first dibs.

Have a much better sense of how the inventory performs over the next six to nine months.

I would also say that auctions really potentially does change the velocity of sales.

It's the one product we have that creates urgency. It's also a value oriented product, which I think has worked well with the macros that we're currently in.

And so we expect to see those two strategies.

Somewhat synergistically.

Okay.

As Tom So I'll take the next question.

Non transaction revenue.

It's been relatively flat year over year, it's primarily subscription based revenue.

Excluding our design manager, which clearly we sold in quarter, so year over year trends, excluding design manager had been flat relatively flat.

Got it. Thank you and then two follow ups yeah. It looks like some interesting progress on auction just wondering.

The scale of that to start moving the needle like is that a year away. How are you thinking about that and then secondly, how do you correlate sales that you see with the housing market do you think there is a correlation there and is that one metric to watch on on potential future future sales. Thank you.

Yes, so first in terms of auctions and when they move the needle.

To some degree they have so in Q2 for example, auctions were roughly 5% of our total order volume that increased in July in percentage terms. So.

There is less of a <unk> impact because of the <unk> on auctions is lower than that of the rest of the marketplace.

But as long as we continue our current momentum.

I think it will obviously continue to grow and impact.

Over time in terms of the correlation of our sales with the housing market in general we are much more levered to the luxury housing market.

And we have seen continued strength in trade trade out a good quarter in Q2.

Trade growth rates GMB growth rate softened a little bit versus the prior quarter, but were still very healthy and what we hear back from our our designer clients is that.

In Q3, Q3 last year, we were Comping a quarter, where there wasn't typical seasonality. This year. There is some seasonality again, we hear from our customers in Q3 that said they also reported to us that their own pipelines are full and remain.

Healthy so I'm not.

I'm not a macro economist.

We're still early in the adoption cycle of goods.

It all by the design community. So it's sort of hard to know whether you have secular trends how they relate.

Kind of economic cyclicality, but everything we hear from our customers at least over the near term horizon is positive.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Mark Mahaney with Evercore ISI. Your line is now open.

Okay. Thanks, I wanted to ask two topics one on international.

The localized versions out in Germany, and France, just remind us.

The country Road map, so other markets that youre looking to rollout and then your thoughts on how long it will take those two markets to ramp up to where you where you want them to be now that their launch now that they are localized is that something that takes a year or two or is that half of the year. Just your thoughts on how quickly that takes to ramp up to be met.

<unk>, because there's clearly a lot of kind of pent up opportunity there given your.

Data points, you've disclosed about the percentage of sellers and buyers that are already overseas.

Yes, so just to recap it means though I was our first full month, where we had kind of sequential comp for international and what we saw was traffic from German and French IP domains, meaning not necessarily only to the new sites that we launched but overall from those countries were.

Between the two of them well over 50%. So we're pleased with our progress there, particularly since our first priority is to grow traffic.

In terms of both the roadmap for other countries and then also kind of the overall impact.

In terms of the roadmap for other countries. Our first priority is to make sure that we developed the playbook via <unk>.

Scaling, France, and Germany, So thats, both growing traffic organically and Inorganically and then obviously converting that into orders.

We're still in the early stages there.

As soon as we feel like we have a good handle on that then given the cost.

We'll then apply that to new markets, but I think it's a little premature to assign a month or a quarter to either of your questions.

Okay, and then one follow up on auctions I know people have already asked about this a little bit is there any are there any pockets of resistance to the rollout of options do you find that there are certain seller bases certain categories or certain buyer cohorts that we.

We would prefer not to have options, which seemed like a pretty good win for for the marketplace for sellers and buyers I know, it's a small part of your business now, but they have kind of a hybrid.

As ebay did way in the past by now and auction format. So just could you just talk about the resistance to if there are any or the obstacles to getting options more broadly rolled out.

Yes, so on the demand side I wouldn't call it resistance, but I mean auctions don't really work as well with a trade with the interior designer business model.

They operate on schedules and almost definition really of course auctions don't really correspond to customer buyers schedules. So thats the customer segment for which it isn't a perfect fit on the consumer side, obviously on some level of appeals, everyone, particularly people who were focused on value. So we do see.

Occasionally for example, designers, who appreciate value or because they appreciate value by but usually they are buying for their own account rather than for their clients' accounts.

On the demand side. The biggest obstacle is really awareness I mean, we've been in business for almost 20 years in one form or another without auctions and now all of a sudden we've had them for eight months, so kind of growing awareness among both our existing buyers that we have this format in understanding how it works as well as marketing to people who love.

Options in our active auction buyers, but because we haven't had auctions haven't been first dibs customers.

I think the second challenge on the supply side.

Again, I would say I wouldn't call it anything an obstacle I mean sellers have adopted.

Auctions and actually we saw a very substantial acceleration in supply growth in Q2 versus Q1 from our sellers I think the biggest challenge is really the learning curve of helping our sellers understand how to price for auctions versus the marketplace.

The reason why auctions are so compelling.

Is that.

Whereas in the marketplace pricing sellers' price typically at a slight premium to where they anticipate the market clearing price to end up for a given item because we support negotiations auctions. It works. The other way right you wanted to generate a competitive by net dynamic by starting with a lower price. So that's a.

Somewhat counterintuitive.

Pricing strategy for our sellers and very different than then.

And then the way they price on <unk> for a long time now so a lot of our effort is focused on teaching them.

How to price to maximize the value and the impact of auctions.

Thank you David.

Thank you as a reminder to ask a question at this time. Please press star one one our next question comes from Ralph Checkered with William Blair. Your line is now open.

Good morning, Thanks for taking the question two if I could.

Last quarter, you talked about improvements in shipping loss provisions just curious how that trended this quarter and then maybe just kind of turning to expenses. It sounds like youre, making some improvements both on the short term, but maybe a little bit longer term duration, but at the macro deteriorated further and maybe kind of just speak to your philosophy.

And how you're thinking about margins.

Could you potentially be more aggressive on some of the cost savings. Thank you.

Sure. This is Tom.

I'll take both of those both of those questions. So shipping.

Shifting charges to remind everyone, our primarily borne by by the buyer.

When our shipping quotes are different from our actual expenses, we do take a loss.

Shipping expenses in the second quarter were minimal less than $100000.

We do continue to increase our pre quotes to reflect the changes in shipping prices. So.

Youre correct in stating in Q4, we we took a larger charge.

We of course corrected in Q1, and we've continued to.

Two.

Ensure that our <unk>.

Pricing is appropriate.

And the charges in the quarter was minimal as a result.

As far as on the expense side.

Yes, we are committed to calibrating our expenses to current demand environment.

And we are evaluating all of our options.

During Q2 as you mentioned, we did begin to make some concrete actions to align our expenses to demand.

We drastically reduced our number of open roles limiting our hiring to only critical hires.

We increased our efficiency thresholds for our performance marketing spend.

Additionally, we are renegotiating aggressively on all new contracts as they come to come up.

And we began actively marketing our New York office space as well as a result, obviously that will take time to realize any savings there.

And we're going to continue to work in the third quarter.

We're moving quickly to adjust our plans and we would expect you to see substantially more financial progress, which will flow through primarily in Q4.

I will say I am not satisfied with the EBITDA margins that we reflected in the third quarter guidance and we are focused on identifying.

And realizing more incremental savings. However, we do want to be careful not to trade off future growth drivers.

So we continue to resource our key strategic initiatives the ones that David has been talking about on this call auctions in international and the supply expansion.

And we expect to drive long term growth, there and keeping our competitive position. So we are going to continue to fund those strategic initiatives.

Okay. Thank you.

Thank you.

I'm currently showing no further questions at this time.

This does conclude today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Good day, and thank you for standing by and welcome to the first Dibs Dot Com second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Kevin The bus. Please go ahead.

Okay.

Good morning, and welcome to first Data's earnings call for the quarter ended June 30th 2022.

I'm, Kevin the Buzz head of Investor Relations and corporate development.

Joining me today are CEO , David Rosenblatt, and CFO , Tom Edgar Gino.

David will provide an update on our business.

<unk>, our strategy and growth opportunities.

And Tom will review, our second quarter financial results and third quarter outlook.

This call will be available via webcast on our Investor Relations website at investors <unk> first did dot com.

Before we begin please keep in mind that our prepared remarks include forward looking statements.

Including but not limited to statements.

Statements regarding guidance and future financial performance.

Demand.

Growth prospects.

Business plans and strategic.

Initiatives.

Evaluation of alternatives.

Is this an economic trends or dynamics.

Including e-commerce growth rates and our potential responses there too.

International opportunities and competitive position.

Our actual results may differ materially from those expressed or implied in these forward looking statements as a result of risks and uncertainties include.

Including those described in our SEC filings.

Any forward looking statements that we make on this call are based on our beliefs and assumptions as of today.

And we disclaim any obligation to update them, except to the extent required by law.

Additionally, during the call, we will present, GAAP and non-GAAP financial measures.

A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release.

Which you can find out our investor relations website, along with the replay of this call.

Lastly.

Please note that all growth comparisons are on a year over year basis.

Less otherwise noted.

I'll now turn the call over to our CEO , David or anything but.

David.

Thanks, Kevin Good morning, and thank you for joining us today.

Amid a challenging operating environment for E Commerce and home goods, we delivered Gms and revenue within our guidance range and EBITDA margin above our guidance range as we manage expenses in light of continued soft consumer conversion.

We strengthened our balance sheet and streamlined our business with the sale of design manager for $14 8 million.

Generating a healthy nine $7 million return on our purchase price.

Lastly, we're pleased with early signs of traction in our key strategic initiatives auctions international expansion and supply growth.

During the quarter some business trends remained resilient as compared to our last earnings report while other softened.

First I'll review what remained resilient.

Traffic growth accelerated versus the first quarter or do the SCO games and upper funnel activity in general remained robust trade.

Trade growth continued and returning buyer conversion increased as well.

Supply growth remains healthy helped by our pricing test.

Adding new sellers at three times last year's monthly run rate.

Now onto what softened.

Most importantly, consumer growth, which has historically, 70% to 75% of <unk> declined further due to conversion softness, particularly for new buyers.

In addition, we are seeing a traffic mix shift towards mobile web, which is a lower converting device type.

Given softening demand, we have begun recalibrating, our expenses, which Tom will review in more detail.

We see this most significantly in lower conversion rates, we have begun and intend to continue responding forcefully to this change set of circumstances.

At the same time, what encourages us is that with the exception of new buyer conversion. We believe the long term drivers of our competitiveness and the value we provide the buyers and sellers remained healthy track.

Traffic growth accelerated in the second quarter, our organic traffic mix increased supply growth is robust and seller churn is low.

Auctions are improving sell through and new buyer activation rates. Additionally, 50% of auction buyers in the second quarter have never purchased from first dibs before.

Lastly, while we intend to continue to invest responsibly in auctions international expansion and supply growth, we are re prioritizing projects and continuing to identify cost efficiencies.

So that when demand for home categories rebounds, our business will be more efficient and in a stronger more competitive position.

We are working with our financial advisors at Allen and company to evaluate all options.

Organic traffic mix increased by over five percentage points year over year, driven by continued strength in FCO, coupled with a pullback in paid staff.

During the second quarter, we prioritize projects to increase checkout entry and reduce purchase friction for example, we launched improvements for low inventory pages tested increasing the visibility of items with lower shipping costs and search and improve the discovery of auctions listings, which have higher sell through and.

Conversion rates.

Conversion is a game of incremental gains the goal is to keep accumulating small wins that compound over time.

On the supply side, our seller team launched a bulk upload tool saving sellers time and supporting listings growth.

Additionally, we rolled out inventory lifecycle recommendations, which suggest AIDS and engagement based actions to help sellers optimized sell through.

We also made meaningful progress in our strategic initiatives, which I'll review in more detail below.

Auctions are making great progress vitter activity order volume and <unk> continue to grow sequentially. In June for example, auctions accounted for over 5% of total orders as compared to 1% of supply and this trend carried over into July .

In addition to higher sell through rates another strategic rationale for building auctions was activating new buyers during the quarter, 50% of bidders had never made a purchase on first dibs.

<unk> average order value was under $1000 less than half of the <unk> in our marketplace overall.

Lower <unk> is what we expected for auctions and is consistent with the value oriented channel.

We also build tools for scaling auction events.

These are curated groupings of items with the same launch date akin to a physical auction.

<unk> drive urgency traffic and bid participation.

Starting in May we increased the cadence of curated events to monthly from every other months. Additionally, our work to boost supply and set competitive options pricing is ongoing.

Given the success, we're seeing we are evaluating shifting existing resources to auctions.

June also marked the first full month of operations for both of our localized sites, Germany went live on April 26, and France launched on May 10 users.

Traffic from French IP addresses grew 60% year over year during the quarter, while traffic from German IP addresses grew over 75% year over year, even though these sites launched late in the quarter.

Building, an international business is a multi year process and we're off to a great start.

<unk> into our message center.

We see a meaningful long term international opportunity today about 40% of our sellers one third of our traffic and one fifth of our buyers are located outside the United States.

<unk> drives traffic made search results more robust and increases the chances that we will make a match.

Given our long tail of one of a kind listings, providing buyers with more options should ultimately translate into higher order volumes.

Our new seller pricing test, which launched in January continued to perform well.

We signed over 700, new sellers in the second quarter ending June with over 6100 seller accounts.

The number of sellers and listings continue to grow at healthy double digit rates and our monthly solar acquisition was triple our monthly average in 2021.

Insistent with the first quarter we.

We expect the pace to slow during the summer when many sellers take vacation.

As a reminder, we launched the pricing tests for new sellers in January .

This allows sellers to choose the plan that best fits their business and includes a subscription free tier with a higher commission rate.

This reduces friction by lowering the upfront cost of drawing first dibs and remains the most popular option for new sellers.

Despite material growth in our seller base, the absolute number of churn sellers declined year over year.

As I mentioned above while we believe the metrics for auction international and supply growth are trending in the right direction. These efforts are in their early stages and CMV contribution isn't yet large enough to offset softening demand.

During the quarter GMB growth rates soften the month over month from April through June and this trend has carried over into July .

Given the slowdown we're focusing on what we can control and taking actions to better align expenses to demand. For example, we have drastically reduced the number of open roles limited hiring to critical positions and increase the efficiency targets on our performance marketing spend.

However, fundamentals like traffic and supply growth remained healthy and our strategic initiatives are gaining traction, which we believe in turn sets us up for future success.

We intend to continue adjusting to the environment, while focusing on the strategic initiatives that we believe will drive our long term growth.

We are also working with our financial advisors that Allen <unk> company to review multiple paths to enhance GMB growth and shareholder value.

When e-commerce growth rebounds, we expect to be more focused more efficient and poised to capitalize.

Thanks, David.

We delivered <unk> revenue at the low end of our guidance range and EBITDA margins above the high end.

<unk> was $104 $8 million down 2%.

In the first quarter, we saw strong top of funnel engagement, but softer conversion.

These trends are exaggerated in the second quarter.

While traffic growth accelerated conversion softened, particularly for new buyers.

This was partially offset by returning buyer conversion, which improve modestly year over year.

Trey GMB growth decelerated, but remained positive while consumer GMP declined.

As a reminder, when we referenced trade <unk> or consumer GMP. We are speaking about the subsets of on platform GMB attributable to each of these buyer groups.

Custom furniture.

Average order value growth moderated in part due to a mix shift to auctions lower IOP for auctions is a conscious part of our strategy and has many benefits, including higher sell through conversion and new buyer activation.

We ended the quarter with approximately 69300 active buyers flat year over year and down 3% quarter over quarter.

We expect this metric to be choppy near term as we manage through strong comps from the pandemic related e-commerce boost in a period of softer conversion.

On the supply side of the marketplace and we closed the quarter with over 6100 seller accounts up 40%.

Net revenue was $24 $6 million flat year over year transaction revenue, which is tied directly to GMP growth was approximately 70% of revenue with subscription is making up the bulk of the remainder.

Given the design manager sale closed on June 29th second quarter results included a full quarter of contribution.

Design manager accounted for roughly 3% of revenue in the quarter.

Gross profit was $16 $6 million down 4%.

Gross profit margins were 68% down from 70% a year ago.

Gross margins declined year over year due to a higher hosting in co location costs payroll and benefits and stock based compensation the higher hosting in co location costs was the result of accelerated traffic growth, which were not offset by higher JMP in revenue due to softening conversion.

Additionally, our operational teams make up approximately 30% of cost of revenue given current demand we are seeing negative operating leverage here.

Sales and marketing expenses were $11 $3 million flat year over year.

Growth in head count was offset by lower performance marketing spend given the softening conversion, we pulled back on performance marketing during the quarter.

This is an example of recalibrating expenses to match demand.

Sales and marketing as a percentage of revenue was 46% flat year over year.

Technology and development expenses were $6 $6 million up 45% driven by higher stock based compensation and payroll and benefits does reflect both hiring to support our strategic initiatives as well as our annual merit cycle as mentioned above.

As a percentage of revenue technology development was 27% up from 18%.

General and administrative expenses were $7 5 million up 58%. The increase was mainly driven by expenses related to public company costs, including D&O insurance and increased head count and higher stock based compensation and approximately $300000 of one time legal fees related to the sale of design manager.

As a percentage of revenue general and administrative expenses were 31% up from 19%.

We went public in June 2021, so this will be the last quarter of cycling periods without fully loaded public company costs.

Lastly, provision for transaction losses were $1 6 million, 6% of revenue flat year over year.

Combined public company costs and head count supporting strategic initiatives, primarily in technology development were approximately $4 million in the second quarter.

Excluding these expenses our second quarter adjusted EBITDA would have been a loss of roughly $2 million an improvement versus last year.

Moving on to the balance sheet, we ended the quarter with a strong cash and cash equivalents position of $162 $7 million, including the proceeds from our sale of design manager for $14 8 million.

Turning to the outlook demand cool throughout the second quarter and this trend has so far carried into the third quarter.

We forecast third quarter, GMP of $88 million to $95 million down 19% to 13% year over year.

Net revenue up $20 7 million to $21 $9 million down 19% to 14% year over year.

And adjusted EBITDA margin loss up 37% to 33%.

Lastly, <unk>.

Starting in the third quarter results will not include design manager, which generated less than $1 million in quarterly revenue and was operated approximately EBITDA breakeven.

We renegotiate contracts as they renew Additionally, we are actively marketing our New York office space with the goal of reducing our real estate footprint.

Some of these actions our immediate while others will take time to impact the income statement.

We are not satisfied with the EBITDA margin is reflected in our third quarter and are focused on identifying and realizing incremental cost savings.

We intend to adjust as needed balancing long term growth and EBITDA margin expansion.

Thank you for your time I'll now turn the call over to the operator to take your questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone. Please demo we compile the Q&A roster.

Our first question comes from Trevor Young with Barclays. Your line is now open.

Great. Thanks, two if I may 1st given the current environment. It would seem that they are balance sheet gives you a pretty sizeable competitive advantage versus some of the private in the states.

M&A opportunities might make sense I'm, obviously, not looking for specific target, but rather like any categories that are complementary or any capabilities that might be attractive in the context of buy versus build and then second one on the strong trends in auction could you just provide some color on which categories tend to do better in that auction format.

Hey, good morning.

The criteria is any different in this environment than it ever would be.

Any other we have a very clear strategy and I think we would evaluate possible partners in the context of.

Being able to help those strategies, so it could be straight consolidation or it could be some of the things you mentioned vertical expansion geographic expansion and so on.

But overall again I don't think its.

I don't think its any fundamentally different than any other market environment and in all cases, we would it's important for us to remain focused on our strategy.

In terms of auctions as I mentioned in the script. We are very pleased with our growth in auctions order volume for example, in Q2 was up 49% versus Q1.

I think it's a little too early to call in.

Among different verticals that said jewelry and art had been strong for us, but again, we think it's super early and Thats in.

The opportunity exists in all of our verticals.

Yes.

Great. Thanks, David.

Thank you.

Our next question comes from the line of Nick Jones with JMP Securities. Your line is now open.

Great. Thanks for taking the questions.

As with kind of weaker conversion and just kind of challenged macro conditions there.

There are options on the platform to kind of get a little more nimble with maybe lower <unk> items that could convert.

Better and then a second question on kind of shifting preference to mobile.

Sure.

Mobile browser I think is what you said.

I mean, what initiatives do you have in place to kind of drive conversion up there that forcing people maybe more into the app as opposed to the mobile browser.

Color there would be great. Thanks.

Yes, so a couple of things first let me start with conversion in.

In general the way I would characterize our top of funnel activity is that.

The very top of the funnel traffic and engagement metrics, including things like favored ing.

And registrations and so on have been very healthy as healthy as they've ever been in the business.

When we look at conversion the softness in conversion is concentrated or specific to new buyer conversion.

The conversion rate from returning buyers is actually higher or was higher in Q2 than it had been in Q2 of prior.

And as you correctly point out that softness in turn is driven largely by a mix shift in favor of.

Mobile web.

And lower converting channels.

During out how to optimize how we present shipping prices.

And.

Changing around the format on mobile web landing pages and so on yes, we want to continue to drive people into the app as well as conversion rates, which are substantially higher than mobile web.

With respect to your second question in terms of <unk>.

We have seen relative strength actually in lower <unk>.

Orders, which for US is below $1000 I think thats across the board auctions has a <unk> that is kind of in that ZIP code and then we're seeing at the same time strength in the non auction marketplace at those price points as well, where we've seen softness is that higher.

<unk> levels again not surprisingly.

We are continuing to feed that primarily through our strategy to expand supply via experimentation with different pricing formats.

Seller pricing format.

Thank you. Our next question comes from the line of Justin Post with Bank of America. Your line is now open.

Great. Thank you.

Just a couple of questions on sellers Youre seeing a lot of accounts added, but obviously <unk> is slowing.

Any any pushback there and how is non transaction revenue trending.

There.

Can you take the first question and then I'll kick it over to Tom for the second question in terms of supply. So yes, as you correctly point out we're adding sellers that are roughly three times the rate that we added them historically churn I will also note is that kind of all time historical lows.

We're we're in the phase now, where we're adding a lot of sellers obviously.

Most of that supply has not yet.

<unk> into orders.

That's in line with the experience of all sellers on first dibs.

We will have a much better sense of how the inventory performs over the next six to nine months.

I would also say that auctions really potentially does change the velocity of sales.

It's the one product we have that creates urgency. It's also a value oriented product, which I think has worked well with the macros that we're currently in.

And so we expect to see those two strategies.

Somewhat synergistically.

This is Tom so I'll take the next question.

Non transaction revenue.

<unk> been relatively flat year over year, it's primarily subscription based revenue.

Excluding our design manager, which clearly we sold in quarter, so year over year trends, excluding design manager had been flat relatively flat.

Got it. Thank you and then two follow ups yeah. It looks like some interesting progress on auction just wondering.

Yes, so first in terms of auctions and when they move the needle.

So to some degree they have so in Q2 for example, auctions were roughly 5% of our total order volume that increased in July in percentage terms. So.

There is less of a <unk> impact because of the <unk> on auctions is lower than that of the rest of the marketplace.

As long as we continue our current momentum.

I think it will obviously continue.

Grow an impact over time.

In terms of the correlation of our sales with the housing market in general we're much more levered to the luxury housing market.

And we have seen continued strength in trade trade out a good quarter in Q2.

Trade growth rates GMB growth rate softened a little bit versus the prior quarter, but were still very healthy and what we hear back from our our designer clients is that.

Healthy so I'm not.

I'm not a macro economist.

We're still early in the adoption cycle of digital by the design community. So it's sort of hard to know whether you have secular trends how they relate to.

Kind of economic cyclicality, but everything we hear from our customers at least over the near term horizon is positive.

Great. Thank you very much.

Thank you. Our next question comes from the line of Mark Mahaney with Evercore ISI. Your line is now open.

Okay. Thanks, I wanted to ask two topics one on international.

The localized versions out in Germany, and France, just remind us.

The country Road map, so other markets that youre looking to rollout and then your thoughts on how long it will take those two markets to ramp up to where you where you want them to be now that their launch now that they're localized is that something that takes a year or two or is that half of the year. Just your thoughts on how quickly that takes to ramp up to be.

Material to you because there's clearly a lot of kind of pent up opportunity there given your.

Data points, you've disclosed about the percentage of sellers and buyers that are already overseas.

Yes, so just to recap it means though I was our first full month, where we had kind of sequential comp for international.

What we saw was traffic from German and French IP domains, meaning not necessarily only to the new sites that we launched but overall from those countries were up between the two of them well over 50%. So we're pleased with our progress there, particularly since our first priority is to grow traffic.

In terms of.

Both the roadmap for other countries and then also kind of the overall impact I mean.

And in terms of the roadmap for other countries. Our first priority is to make sure that we developed the playbook.

Scaling, France, and Germany, So thats, both growing traffic organically and Inorganically and then obviously converting that into orders.

We are still in the early stages there and.

As soon as we feel like we have a good handle on that then given the cost.

We'll then apply that to new markets, but I think it's a little premature to assign a month or a quarter either of your questions.

We would prefer not to have options it would seem like.

Pretty good win for for the marketplace for sellers and buyers I know, it's a small part of your business now, but you have kind of a hybrid.

As ebay did way in the past by it now and auction format. So just could you just talk about the resistance to if there are any or the obstacles to getting options more broadly rolled out.

Yes, so on the demand side I wouldn't call it resistance, but I mean auctions don't really work as well with the trade with the interior designer business model.

They operate on schedules and almost definition really of course auctions don't really correspond to customer buyers schedules. So thats the customer segment for which it isn't a perfect fit on the consumer side, obviously some level of appeals, everyone, particularly people who were focused on value. So we do see.

Occasionally for example, designers, who appreciate value or because they appreciate value by but usually they are buying for their own account rather than for their clients' accounts.

I think on the demand side. The biggest obstacle is really awareness I mean, we've been in business for almost 20 years in one form or another without auctions and now all of a sudden we've had them for eight months, so kind of growing awareness among both our existing buyers that we have this format in understanding how it works as well as marketing to people who love.

Options in our active auction buyers, but because we haven't had auctions haven't been first dibs customers.

I think the second challenge on the supply side again.

Again, I would say I wouldn't call. It anything an obstacle I mean sellers have adopted auctions and actually we saw a very substantial acceleration in supply growth in Q2 versus Q1 from our sellers I think the biggest challenge is really the learning curve of helping our sellers understand how to.

Price for auctions versus the marketplace part of the reason why auctions are so compelling.

That.

Whereas in the marketplace pricing sellers' price typically at a slight premium to where they anticipate the market clearing price to end up for a given item because we support negotiations and Oct.

It works the other way right you wanted to generate a competitive by net dynamic by starting with a lower price.

So that is somewhat counterintuitive.

Pricing strategy for our sellers and very different than.

And then the way they price on first it for a long time now so a lot of our effort is focused on teaching them.

How to price to maximize the value and the impact of auctions.

Thank you David.

Thank you as a reminder to ask a question at this time. Please press star one one our next question comes from Ralph Checkered with William Blair. Your line is now open.

Hi, good morning, Thanks for taking the question two if I could.

Last quarter, you talked about improvements in shipping loss provisions just curious how that trended this quarter and then maybe just kind of turning to expenses. It sounds like youre, making some improvements both on the short term, but maybe a little bit longer term in duration, but the macro deteriorated further maybe kind of just speak to your philosophy.

And how you're thinking about margins.

Could you potentially be more aggressive on some of the cost savings. Thank you.

Sure. This is Tom.

I'll take both of those both of those questions. So shipping.

Shifting charges to remind everyone, our primarily borne by by the buyer.

When our shipping quotes are different from our actual expenses, we do take a loss.

Shipping expenses in the second quarter were minimal less than $100000.

We do continue to increase our pre quotes to reflect the changes in shipping prices. So.

Youre correct in stating in Q4, we we took a larger charge we've course corrected in Q1 and we've continued to.

Two.

Ensure that our <unk>.

Pricing is appropriate.

And the charges in the quarter was minimal as a result.

As far as on the expense side.

We are committed to calibrating our expenses to current demand environment.

And we are evaluating all of our options.

During Q2 as you mentioned, we did begin to make some concrete actions to align our expenses to demand.

We drastically reduced our number of open roles limiting our hiring to only critical hires.

We increased our efficiency thresholds for our performance marketing spend.

Additionally, we are renegotiating aggressively on all new contracts as they come to come up.

And we began actively marketing our New York office space as well as a result, obviously that will take time to realize any savings there.

And we're going to continue to work in the third quarter.

We're moving quickly to adjust our plans and we would expect you to see substantially more financial progress, which will flow through primarily in Q4.

I will say I am not satisfied with the EBITDA margins that we reflected in the third quarter guidance and we are focused on identifying.

And realizing more incremental savings. However, we do want to be careful not to trade off future growth drivers.

So we continue to resource our key strategic initiatives the ones that David has been talking about on this call auctions in international and the supply expansion.

And we expect to drive long term growth, there and keeping our competitive position. So we are going to continue to fund those strategic initiatives.

Okay. Thank you.

Thank you.

I'm currently showing no further questions at this time.

This does conclude today's conference call. Thank you for participating you may now disconnect.

Q2 2022 1stdibs.Com Inc Earnings Call

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